Papads or fryums, GST remains a political hot potato

For about a year after the Goods and Services Tax (GST) made its arangetram, Twitter was the go-to place to seek clarifications on various aspects of the law. Later, GST help desks were set up across the country but many taxpayers were of the opinion that the help desks themselves needed help. As the law developed, the Authority for Advance Rulings (AAR) took over the job of ruling on the intricacies of the laws. Looking at the spectrum of rulings given by AARs across the country, many have reached the conclusion that AAR decisions are largely pro-revenue.

In 2021, Twitter appears to have regained pole-position for clarifications. Industrialist Harsh Goenka tweeted, “Did you know that a round papad is exempt from GST and a square papad attracts GST? Can you suggest a good chartered accountant who can make me understand the logic?” GST and logic can never be used in the same sentence as both are poles apart.

The Central Board of Indirect Taxes and Customs (CBIC) decided to respond to Goenka’s tweet and clarified that papad, by whatever name known, is exempt from GST vide Entry No. 96 of GST notification No.2/2017-CT(R). This entry does not distinguish based on the shape of the papad. This notification is available at http://cbic.gov.in. One can only hope that Goenka’s Twitter handle does not become an unofficial e-help desk for all things GST. While the response of the CBIC is to be appreciated, it should be noted that there are cases pending across the country on the rate of GST for papad-like things such as fryums.

Food has always been a controversial area between the makers of indirect tax laws and the taxpayer. The erstwhile service tax laws had concepts such as a distinction between indoor and outdoor catering. They also stated that a wholesome meal provided by the Indian Railways was exempt from service tax. What constitutes a wholesome meal was not clarified. The GST also has made a fine distinction within food and drinks. For instance, tender coconut water other than put up in a unit container and bearing a registered brand name is exempt while tender coconut water put up in a unit container and bearing a registered brand name, or bearing a brand name is taxed at 5 per cent. A rate of 5 per cent (wherein most food products are parked) would be acceptable to anyone since the impact on end prices is expected to be minimal. Other sectors have not been so lucky as food products in terms of being taxed at nominal rates. The automobile sector is a case in point.

GST on automobiles

In India, automobiles are emotional for their owners, profitable for the manufacturers and lucrative for the taxman. Just as water finds its own level, automobile drivers in India find their own path even on the narrowest of India’s roads. Many were expecting the government to do something in GST to encourage automobile owners in India to keep the momentum of purchases going. Players in the automobile industry have been seeking a reduction in the GST rate for the past couple of years. Last year, two-wheeler manufacturers were expecting a cut in GST rates to give a boost to sales that were hit due to the impact of the pandemic. Recently, leaders of large automobile companies had a sort of a face-off on GST rates with the revenue secretary in a public meeting. The automobile industry has argued that it is inappropriate to tax both two-wheelers and luxury four-wheelers at 28 per cent.

The only response that the government has given is that if players in the industry are so badly affected, they should reduce their royalty payments to offset the impact of the pandemic. With the automobile industry increasingly going electrical, vehicles in the non-electrical segment could turn out to be really costly in comparison. Electric vehicles get taxed at 5 per cent under the GST. As in most things in India, it will take some time for a majority of Indians to opt for electric automobiles. It is imperative that the government reduce the rate of GST on non-electric vehicles to 18 per cent for now keeping a target of 12 per cent for the future.

Till date, a detailed and comprehensive study of the impact of GST on retail prices and inflation has probably not been made. The GST has not added much to inflation in India because save for a few aberrations such as automobiles and cement, GST rates are in a good zone now. Essential commodities and critical items are bucketed in the 5 per cent rate while most services are at 18 per cent as against the erstwhile 15 per cent. Most taxpayers in India are savvy enough to ensure that the increase of 3 per cent is either paid for by their customers or is availed by them through input tax credit, thereby negating the impact on end prices. Apart from the so-called sin goods which attract a tax of 28 per cent apart from different rates of cess, most goods are in either the 5, 12 or 18 per cent bracket. The GST Council should debate whether a rate of 20 per cent for most services and sin goods would make sense considering the fact that the pandemic has impacted many entities in this segment. If the GST Council is able to work out an alternate mechanism to compensate state governments for loss of revenues, the GST Compensation Cess can be removed.

This is easier said than done since the backlog of compensation payable to state governments is increasing every single day. History is evidence of the fact that cesses make messes of the end price that the customer pays.

However, with monthly GST revenues regularly crossing the magic threshold of Rs 1,00,000 crore, the government would not want to rock the boat too much. Since some concessions are inevitably given in the build-up to the next elections, the government would not want to exhaust all the limited options they have now. The more things change under the GST, the more they remain the same.

(The writer is a Bengaluru-based tax expert)